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I believe Robinhood is violating Finra rules around margin trading though. Do they really want to go to court and claim incompetence on their own part? Trust i

by tempsy 7y ago

I believe Robinhood is violating Finra rules around margin trading though. Do they really want to go to court and claim incompetence on their own part? Trust is everything in fintech. Now that this story has moved from one obscure subreddit to Bloomberg I don't know how they start to reclaim it if they cannot calculate numbers correctly as a brokerage. The consensus on /r/wallstreetbets is that Robinhood is a joke, which is pretty much the last thing you want to be thought of as a financial services provider.

H8crilA 7y ago
Indeed, they should be worried about their own skin. The SEC should shut down their operations immediately, at least anything that involves margin. Like today. It's not even about PR, this is a pretty bad violation of federal law. We don't know how many people may be using it. This is the financial equivalent of forgetting to check password on a login form. It's that stupid.
- AznHisoka 7y ago
  If they shutdown their operations today, that would be incredibly detrimental to existing users. what if I held an option expiring this week? Am I forced to let it expire because the SEC forced them to shutdown? Seems like a douchebag move. sensible thing would be to remove margin from all accounts. if you want to prevent anymore transactions, at least give people some heads up so they can liquidate time-sensitive positions.
ozi 7y ago
> I believe Robinhood is violating Finra rules around margin trading though. Yeah, this is why the scenario is unique to most other r/wallstreetbets losses. With a good attorney the guy may come out of this relatively unscathed.
pc86 7y ago
How long ago was the whole /u/ir0nyman debacle with box spreads? RH's incompetence in the regulatory space has been pretty well known for quite a while now (well before ir0nyman).
- tempsy 7y ago
  Probably less than a year ago. Yeah, but when this stuff becomes mainstream fodder it becomes more embarrassing to regulatory agencies if it is left unresolved in the public eye. The box spread thing wasn't on the frontpage of Bloomberg/CNBC AFAIK.
  - 0xffff2 7y ago
    I don't know about the front page, but /u/ir0nyman definitely got a mention in Money Stuff, which basically constitutes "winning" r/wsb AFAICT. I doubt there's anyone in finance who hasn't at least heard of the ongoing wsb/RH drama at this point.
gowld 7y ago
The consensus on /r/wallstreetbets is also that /r/wallstreetbets is a joke, so it's confusing.
tptacek 7y ago
Help me understand what is interesting about this bug that makes unauthorized margin trading RH's responsibility rather than the customer's? I thought I understood what was happening from the WSB thread, but since so many people here seem to think this is sui generis and clearly bad for RH, there must be something I'm missing. To me, it looks like a bunch of people on Reddit found a bug and then, extremely ill-advisedly, exploited it flagrantly in real-money accounts they controlled. Based on my understanding of the situation, which may be weak, I'd be a lot more worried to be one of these customers than I would to be RH at this point.
- aristophenes 7y ago
  They're both responsible, the difference is Robinhood has to settle the trade in a day, and then they have to try to collect from someone who likely doesn't have any assets to give them. And if they do, they will still likely have to take them to court. So it costs Robinhood time and money even if they get their money back, which is doubtful.
- pnako 7y ago
  We don't have all the details. Either they have a working portfolio valuation model, and they missed this rather obvious case of linking a written call to its underlying, or they don't have a proper valuation model at all. If they actually do portfolio valuation by simply valuing each line and adding them, then it's not just wrong but gross incompetence. It would not be the first broker to blow up due to mispricing clients derivatives portfolios. The idea that a startup is letting millenials trade derivatives like this is absurd in the first place.
  - tptacek 7y ago
    It doesn't seem, from the descriptions, to be possible to exploit this bug without knowing that you're doing it. It's not like they simply don't enforce margin limits; in fact, it looks like you have to apply the bug iteratively to do anything interesting with it. That being the case, it doesn't appear to me like the people exploiting it will have any way of talking their way out of the intentionality of their actions, at least not to a "reasonable person" standard that would be applied in civil court. It looks like cut-and-dried fraud. Am I wrong about that?

by tempsy 7y ago

H8crilA 7y ago

Indeed, they should be worried about their own skin. The SEC should shut down their operations immediately, at least anything that involves margin. Like today. It's not even about PR, this is a pretty bad violation of federal law. We don't know how many people may be using it. This is the financial equivalent of forgetting to check password on a login form. It's that stupid.

AznHisoka 7y ago
If they shutdown their operations today, that would be incredibly detrimental to existing users. what if I held an option expiring this week? Am I forced to let it expire because the SEC forced them to shutdown? Seems like a douchebag move. sensible thing would be to remove margin from all accounts. if you want to prevent anymore transactions, at least give people some heads up so they can liquidate time-sensitive positions.

ozi 7y ago

> I believe Robinhood is violating Finra rules around margin trading though. Yeah, this is why the scenario is unique to most other r/wallstreetbets losses. With a good attorney the guy may come out of this relatively unscathed.

pc86 7y ago

How long ago was the whole /u/ir0nyman debacle with box spreads? RH's incompetence in the regulatory space has been pretty well known for quite a while now (well before ir0nyman).

tempsy 7y ago
Probably less than a year ago. Yeah, but when this stuff becomes mainstream fodder it becomes more embarrassing to regulatory agencies if it is left unresolved in the public eye. The box spread thing wasn't on the frontpage of Bloomberg/CNBC AFAIK.
- 0xffff2 7y ago
  I don't know about the front page, but /u/ir0nyman definitely got a mention in Money Stuff, which basically constitutes "winning" r/wsb AFAICT. I doubt there's anyone in finance who hasn't at least heard of the ongoing wsb/RH drama at this point.

gowld 7y ago

The consensus on /r/wallstreetbets is also that /r/wallstreetbets is a joke, so it's confusing.

tptacek 7y ago

Help me understand what is interesting about this bug that makes unauthorized margin trading RH's responsibility rather than the customer's? I thought I understood what was happening from the WSB thread, but since so many people here seem to think this is sui generis and clearly bad for RH, there must be something I'm missing. To me, it looks like a bunch of people on Reddit found a bug and then, extremely ill-advisedly, exploited it flagrantly in real-money accounts they controlled. Based on my understanding of the situation, which may be weak, I'd be a lot more worried to be one of these customers than I would to be RH at this point.

aristophenes 7y ago
They're both responsible, the difference is Robinhood has to settle the trade in a day, and then they have to try to collect from someone who likely doesn't have any assets to give them. And if they do, they will still likely have to take them to court. So it costs Robinhood time and money even if they get their money back, which is doubtful.
pnako 7y ago
We don't have all the details. Either they have a working portfolio valuation model, and they missed this rather obvious case of linking a written call to its underlying, or they don't have a proper valuation model at all. If they actually do portfolio valuation by simply valuing each line and adding them, then it's not just wrong but gross incompetence. It would not be the first broker to blow up due to mispricing clients derivatives portfolios. The idea that a startup is letting millenials trade derivatives like this is absurd in the first place.
- tptacek 7y ago
  It doesn't seem, from the descriptions, to be possible to exploit this bug without knowing that you're doing it. It's not like they simply don't enforce margin limits; in fact, it looks like you have to apply the bug iteratively to do anything interesting with it. That being the case, it doesn't appear to me like the people exploiting it will have any way of talking their way out of the intentionality of their actions, at least not to a "reasonable person" standard that would be applied in civil court. It looks like cut-and-dried fraud. Am I wrong about that?